Birinyi’s S&P 3200 Call – Bull From A 30-Year Bull – David Stockman’s Contra Corner 08-05-15

Salient to Investors:

David Stockman writes:

Laszlo Birinyi says S&P 3200 will be reached by 2017 because there is no reason it cannot keep rising. Since first meeting Birinyi in 1986, I do not ever recall when he was not bullish on equities. His call is wrong because the central bank fed 30-year bull run is over.

The S&P 500 Index’s inflation-adjusted gain of 6.2% per annum since January 1986 compares to only a 2.2% annual gain in real GDP and therefore is unsustainable – two more decades at this spread and the stock market’s capitalization would be several hundred times larger than GDP. From 1956 through the eve of the Greenspan Fed, the Index’s inflation-adjusted gain rose by only 1% per year; while US GDP grew at 3.5% per annum, or 60% more than during the last thirty years.

From 1956-1986, real median family income rose from $36,000 to $60,000, or at 1.7% annually, but has risen less than $4,000 since, at only 0.2% per year. The reason the stock market has gained over the last 30 years in the midst of decelerating real GDP growth and stagnating family incomes is because the Fed’s balance sheet has expanded 22 times, or 11.5% per annum nominal, 9.2% real, and 4 times the growth rate of real output.

During this bull market run, household, business, financial and government debt outstanding has risen $50 trillion, versus only a $13 trillion gain in GDP. In the 100 years prior to 1971, debt rose at 1.5 times GDP growth in real terms: since then it has risen at 3.5 times real growth up to the financial crisis. This huge growth of debt and leverage has come despite the household savings rate declining since 1971, thus has not been funded from honest savings but from fiat credit. This would have caused consumer inflation but for China, the oil exporters and the Asia including Japan buying US dollars by printing huge amounts of their own money, thereby inflating their own currencies and suppressing their exchange rates, and flooding the world with artificially cheap goods. The tidal wave of wage compression flattened labor costs in the developed market tradeable goods industries and spilled over onto their suppliers.

In a world of honest money and credit funded from real savers, China’s exports could not have risen 40 times in less than 3 decades, or at 17% annually – China would have run out of capital to build cheap factories and would have suffered soaring exchange rate increases long ago.

East Asian central bank printing presses recycled the Fed’s monetary inflation back into US financial asset inflation, fueling a massive increase in stock market speculation, LBOs, stock buybacks, and M&A, and the real reason why US stock market capitalization has risen from 60% of GDP from Greenspan’s appointment to 200% today. The true rate of US productivity gain since the late 1980s is a small fraction of pre-1986 levels.

ZIRP, QE, and the Greenspan/Bernanke/Yellen “put” fuel a cycle of debt funded speculation that drives asset prices ever higher, which then become the collateral for an even bigger credit-funded bid for financial assets.

Since 1986, the sum of the market value of equities and credit market debt outstanding has risen from $12 billion to $93 trillion. This bubble cannot continue because the central banks have reached the limits of money printing.  When the Fed begins normalization later this fall, they cannot reverse course because a new round of massive balance sheet expansion would be a repudiation of the last 20-years of Fed policy and trigger a collapse of confidence and selling panic.

China built the biggest pyramid of credit and speculation in history – from a few hundred billion of domestic credit in the early 1990s to $28 trillion today – but capital is now fleeing, upwards of $800 billion in the last year alone. China’s central bank is having to sell its dollar liabilities and shrink the renminbi supply in order to keep its exchange rate from collapsing. The world’s central banks lack the firepower to keep inflating the global financial bubble.

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The Renminbi Will Continue To Appreciate, But Jim Rogers Is Overly Optimistic – Seeking Alpha 09-20-13

Salient to Investors:

Vincent Ho writes:

China has kept wages low through monetary policy to attract capital investment from manufacturers, thereby exporting deflation as low labor wages keep prices of manufactured goods lower.

China’s central bank will intervene to keep inflation relatively low and stop any significant deflation that would curtail economic growth. Periods of significant inflation are likely to be over in China, meaning appreciation of the renminbi will continue, barring any significant worldwide economic slowdowns.

The US can benefit from renminbi appreciation because first the US would find it easier to pay off its mountain of debt and second, US exports would increase.

Short-term, the renminbi will stay where it is because of conflicting pressures:

    • It has to remain relatively weak to a stronger dollar and a weakening yen – China’s economy still heavily relies on US imports.
    • China relies on Japanese imports so an appreciating renminbi would deter Japanese consumers.
    • The renminbi needs to remain relatively strong to stabilize China’s financial market and protect the savings of a very large rural population, decrease incentives for capital flight, and maintain faith in the renminbi for investors.

Chinese growth will slow. pushing back  the date of overtaking US GDP to 2025 from 2017.

China will grow 7.5% in 2013. Jiming Ha at Goldman Sachs estimates growth to slow to 6% annual until 2020 due to a slowdown in the investment activity cycle, and the IMF estimates growth at 8.5%.

The renminbi will appreciate over the coming 5 years and for the long-term. The renminbi is much weaker than the dollar because its economic model currently favors exports over imports. Household consumption will increase as China’s central bank pursues monetary policy favoring consumers over exporters.

World Bank data shows China’s consumption at only 34% of GDP in 2011 versus 55% for Japan in 1980, since when the yen has appreciated well over 110% to the dollar and consumption increased to 60% of GDP in 2011. In 20111, household consumption was 70%, in the US, 74% in Greece, and 60% in Indonesia.

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nvestor Jim Rogers created somewhat of a stir when he made his predictionthat China’s renminbi (CNY ) will appreciate 300-500% to the US dollar (UUP ) in 20 to 30 years. He was quoted saying that if anyone wanted to sell him renminbi he’d be a buyer. For now, there are plenty of people who will take him up on that offer. These type of predictions however raise attention to important questions on what the role of the renminbi (FXCH ) will be as China grows and America is affected. Briefly digging into China’s macroeconomic past, present, and forecasts of the future provides relevant insights.

The Role of the Renminbi In the Global Labor Market

Looking back 30 years starting in the early 1980s, the creation of special economic zones to attract foreign investment was a large step towards market reforms, but the global impact it would have on the world labor markets is understated. China has kept its wages low through monetary policy to attract capital investment from manufacturers. With well over a billion people added onto the global workforce this was a huge abrupt change that has kept labor wages low since. China has been a exporter of deflation as low labor wages keep prices of manufactured goods lower. Not only is this a great thing for consumers around the world who purchase these products but the role of the renminbi, which is valued lower than the dollar, has spurred economic growth elsewhere as most consumers who save on these goods spend it on other goods.

Monetary Policy and Controlling Inflation

China’s central bank will intervene to keep inflation relatively low. China’s economic growth is a offshoot of monetary policy. Compared to the boom-bust cycles of the past China’s inflation has since stabilized considerably. There were two periods in 30 years, the late 80’s and the middle of the 90’s, where unsustainable inflation topped 25%.

China’s CPI Inflation 1994-2013

Globalization is good for Chinese people – JIm Rogers Blog 09-20-13

Salient to Investors:

Jim Rogers writes:
Renminbi globalization is good for all China because it means every investor worldwide can invest there, bringing great market opportunities to China’s commodities. China will become the world’s center for commodity transactions and its financial market will be the best in the world.The US dollar is a troubled currency because Renminbi globalization cannot wait too long.

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